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January 24, 2013

Netflix Inc. capped a turbulent year by posting a surprise fourth-quarter profit and adding more Internet subscribers than expected, news that sent its stock rocketing about 35% in after-hours trading.

As the movie-subscription company expanded internationally and paid handsomely for more video content, Wall Street had been braced for a loss of about 13 cents a share. But Netflix reported a profit of $8 million, or 13 cents a share. In the year-earlier quarter, profit totaled $35 million, or 64 cents a share. "Our holiday season was particularly strong, driven by consumers buying new electronic devices, including tablets and smart TVs," said Netflix Chief Executive Reed Hastings in a letter to investors Wednesday. Fourth-quarter revenue rose to $945 million from $876 million, topping analysts' forecasts for $934 million a year earlier. Shares of Netflix soared to $139, up $35.74, in after-hours trading. On Wednesday, the shares had gained 5.6% to close at $103.26 during regular trading on the Nasdaq stock market. The shares still are far off their high of roughly $300 in 2011, although the stock rallied 49% last year.

The results follow a tempestuous 2012 for Netflix. The company weathered at least two major streaming outages, including one on Christmas Eve.Competition from streaming-content rivals such as Amazon.com Inc. stiffened, and Mr. Hastings had to deal with regulatory scrutiny for a post he made on Facebook, in which he boasted that Netflix had exceeded 1 billion hours of video streaming in a month for the first time. In addition, investor Carl Icahn bought a nearly 10% stake in Netflix in October, aiming to boost the stock price and maybe find a buyer for the company. Mr. Icahn, who has more than doubled his investment, couldn't be reached for comment. The company also grappled with the lingering effects of an ill-fated attempt in 2011 to separate into two businesses. Now "it's clear that they've recovered from their snafu of splitting the company up," said Jason Helfstein, an Oppenheimer & Co. analyst. "They are smartly buying more content that customers want and you can see the result in better subscriber numbers."

Overall, Netflix finished the quarter with 27.15 million U.S. streaming subscribers, a gain of 2.05 million, and 6.12 million outside its home market, an increase of 1.81 million. While those numbers beat its expectations, Netflix failed to reach a goal set early in 2012 to add 7 million U.S. streaming subscriptions by year end. It finished the year with 5.48 million new $8-per-month streaming accounts. Expansion in Europe and South America has come at a cost: Netflix reported a $105 million loss on its international operations, though that was less than its expectations of a loss of $107 million to $119 million. On Wednesday, the Los Gatos, Calif., company said it wouldn't expand into any new international markets in the current quarter, slowing what has been a rapid march overseas.

Netflix has been signing more streaming content deals, hoping to bring in new subscribers in its crucial home market, which accounts for more than 80% of its world-wide total. Last month, Netflix stepped up competition with pay-TV channels HBO, Showtime and others with an exclusive deal to offer Walt Disney Co. movies about eight months after they hit theaters, starting in 2016. And this month it announced accords with Time Warner Inc. to stream a variety of shows, including from the Cartoon Network. Netflix is also diving into original content creation. Next month it will release exclusively to streaming customers "House of Cards," a 13-episode drama starring it helped underwrite, followed by new episodes of "Arrested Development" later this year.

The expense for content led Netflix to end the quarter with negative $51 million in free cash flow, compared with negative $20 million in the third quarter. Netflix said it may look to capital markets to boost its cash reserves. The more profitable DVD-by-mail service continued to shed customers, a trend Netflix has said it expects will endure for the foreseeable future. In last year's final three months, Netflix lost 380,000 DVD customers, about half as many as in the third quarter, and it forecast another as many as 620,000 losses in this year's first quarter. Wall Street Journal

Nearly 70 percent of U.S. law enforcement requests for access to email and other data from Google in the past six months occurred without a warrant, according to first-of-its-kind data shared by the search company Wednesday that is likely to fuel the drive for new privacy laws. Privacy advocates and some influential lawmakers have been pushing to update a 26-year-old law to better protect consumers' personal information in the face of an increasing number of government requests for data from Internet companies.

Google says 68 percent of government requests for emails or data about Gmail users came via subpoenas under the Electronic Communications Privacy Act, a 1986 law that privacy advocates have eyed for years for reform because it requires no warrants for access to data more than 180 days old. The issue is quickly emerging as a congressional legislative privacy priority in 2013, as chairmen of both Hill Judiciary Committees have pledged to take a close look at overhauling the law to prevent government access to old emails without a warrant. Privacy groups have long sought an update to the law to require law enforcement to obtain warrants to access such online data, but until Google's disclosure in a blog post Wednesday, they were largely unaware of just how often government was requesting data through this loophole.

Less than a quarter - 22 percent - of government requests in the last half of 2012 came with a warrant, which authorities can obtain only if they demonstrate probable cause. The remaining 10 percent of requests cannot be easily categorized, Google said. The new peek into the processes the government uses to obtain emails under ECPA comes as part of Google's transparency reports, in which the company has regularly disclosed how many times governments around the world have asked for user data. From July through December of last year, U.S. officials made nearly 8,500 requests - up about 6 percent from the first half of the year and more than double 2009 levels - on almost 15,000 users.

Google complied at least somewhat with 88 percent of the U.S. law enforcement requests - down 2 percentage points from the previous six months. The U.S. requests are nearly quadruple the level of requests from India, the nation with the next highest number of government requests for digital data from the company. "We'll keep looking for more ways to inform you about government requests and how we handle them," Richard Salgado, Google's legal director for law enforcement, wrote in Wednesday's blog post. "We hope more companies and governments themselves join us in this effort by releasing similar kinds of data."

In Congress, Sen. Patrick Leahy (D-Vt.) has been pushing for an overhaul of ECPA that would require a search warrant for access to any email. His bill cleared the Senate Judiciary Committee in November, but the full Senate didn't take up Leahy's measure last year. This week, House Judiciary Committee Chairman Bob Goodlatte (R-Va.) told reporters that he has discussed an ECPA update with Leahy and that they are both interested in moving forward with reform. Some companies - Google included - are already implementing a higher standard, requiring a warrant for any access to email content regardless of how old the message is. They peg that policy - seemingly in conflict with current law under ECPA - to a 2010 6th Circuit of Appeals decision that effectively calls the ECPA unconstitutional.

Privacy advocates say that ECPA needs reform to help provide clarity for Internet companies and others that hold data for long periods of time. "We don't know that all of the other major companies are requiring this," Kevin Bankston, senior counsel at the Center for Democracy and Technology, said at a Tuesday privacy panel at the State of the Net Conference. "There are a lot of smaller providers who may not even be getting proper ECPA counseling at all and just handing stuff over in response to a subpoena, and this reflects one of the broader problems in this area of law, which is an utter lack of transparency." Politico